Financial prfomance

FINALCIAL PERFORMANCE ANALYSIS

CONTENTS

CHAPTERS

PARTICULARS

PAGE-NO

Preliminary index

Abstract List of tables List of charts

Chapter –I

Introduction Introduction to study Objectives of study Need of study Research methodology Scope of the study limitations

1-3

4 5 6 7 8

Chapter –II

profile Company profile

9-23

Chapter –III

Analysis and interpretation of study Introduction of analysis Comparative income statement Comparative balance sheet Common size income statement Common size balance sheet Working capital changes Ratio analysis Balance sheet

24-38

39-42 43-46

47 48-51 52-55 56-66

67

Chapter- IV Findings suggestions conclusion

68 69 70

Chapter- V

Bibliography


ABSTRACT

Financial analysis is the process of identifying the financial strengths and weakness of the firm by properly establishing the relations ship between the items of the balance sheet and profit loss account. Financial analysis can be undertaken by management of the firm, or by parties outside the firm, viz. owners, creditors, investors and others. The nature of analysis will differ depending on the purpose of analyst.

Management, creditors, investors and others to form judgment about

the operating performance and financial position of the firm use the information contained in this statements can get further insight about the financial strengths and weakness of the firm to make their best use and to be able to spot out financial weakness of the firm to take suitable corrective actions.

Thus financial analysis is the starting point for making plans, before

using any sophisticated forecasting and planning procedures. Understanding the past is a prerequisite for anticipating future.

LIST OF CHARTSLIST OF CHARTSLIST OF CHARTSLIST OF CHARTS

TABLE-NO

PARTICULARS

PAGE-NO

1.

LEQUIDITY RATIOS 1.1.CURRENT RATIO 1.2.QUICK RATIO 1.3.NET WORKING CAPITAL RATIO

2.

LEVERAGE RATIOS 2.1.DEBT RATIO 2.2.DEBT EQUITY RATIO 2.3.CAPITAL EMPLOYED TO NET WORTH


INTRODUCTION

In our present day economy, finance is defined as the provision of money at the

time when it is required. Every enterprise, whether big, medium of small, needs finance to carry its operations and to achieve its targets. In fact, finance is so indispensable today that it is rightly said to be the lifeblood of an enterprise. Without adequate finance, no enterprise can possibly accomplish its objectives.

Financial management is applicable to every type of organization, irrespective of its size kind of nature. It is as useful to a small concern as to a big unit. A trading concern gets the same utility from its application as a manufacturing unit may expect. This subject is important and useful for all types of ownership organizations. Where there is a use of finance. Financial management is helpful. Every management aims to utilize its funds in a best possible and profitable way. So this subject is acquiring a universal applicability.

It is indispensable in any organization as helps in: Financial planning and successful promotion of an enterprise;

(i) Acquisition of funds as and when required at the minimum possible cost; (ii) Proper use and allocation of funds; (iii) Taking sound financial decisions ; (iv) Improving the profitability through financial controls; (v) Increasing the wealth of the investors and the nation; and (vi) Promoting and mobilizing individual and corporate savings.

OBJECTIVES OF FINANCIAL MANAGEMENTOBJECTIVES OF FINANCIAL MANAGEMENTOBJECTIVES OF FINANCIAL MANAGEMENTOBJECTIVES OF FINANCIAL MANAGEMENT

Financial management is concerned with procurement and use of funds. Its main

aim is to use business funds in such a way that the firm’s value/earnings are maximized. There are various alternatives available for using business funds. Each alternative course has to be evaluated in detail.

The pros and cons of various decisions have to look into before making a final selection. The decisions will have take into consideration the commercial strategy of the business. Financial management provides a framework for selecting a proper course of action

3.

ACTIVITY RATIOS 3.1.INVENTORY TURNOVER RATIO 3.2.DEBTORS TURNOVER RATIO 3.3.COLLECTION PERIOD

62 63 64

4. PROFITABILITY RATIOS 4.1.GROSS PROFIT RATIO 4.2.NET PROFIT RATIO

65 66


and deciding a viable commercial strategy. The main objective of a business is to maximize the owner’s economic welfare. This objective can be achieved by:

1. Profit Maximization 2. Wealth maximization

1. Profit maximization:

Profit earning is the main aim of every economic activity. A business being an economic institution must earn profit to cover its costs and provide funds for growth. No business can service without earning profit. Profits are a measure of efficiency of a business enterprise. Profits also serve as a protection against risks which cannot be ensured. The accumulated profits enable a business to face risks like fall in prices, competition from other units, adverse government policies etc. Thus, profit maximization is considered as the main objective of business: (i) When profit – earning is the aim of business then profit maximization should be the

obvious objective. (ii) Profitability is a barometer for measuring efficiency and economic prosperity of a business

enterprise, thus, profit maximization is justified on the grounds of rationality. (iii) Economic and business conditions do not remain same at all the times. There may be

adverse business conditions like recession, depression, severe competition etc. A business will be able to service under unfavorable situation only if it has some past earnings to rely upon. Therefore a business should try to earn more and more when situation is favorable.

(iv) Profits are the main sources of finance for the growth of a business. So, a business should aim at maximization of profits for enabling its growth and development.

(v) Profitability is essential for fulfilling social goals also. A firm by pursuing the objective of profit maximization also maximizes socio- economic welfare.

2. Wealth maximization

Wealth maximization is the appropriate objective of an enterprise financial theory asserts that wealth maximization is the single substitute for stockholder’s utility. When the firm maximizes the stockholder’s wealth, the individual stockholder can use this wealth to maximize his individual utility. It means that by maximizing stockholder’s wealth firm is operating consistently towards maximizing stockholder’s utility.

OBJECTIVES OF STUDY 1. To understand, to analyze and to suggest methods of improving profitability management. 2. To identify the key factors affecting the profitability. 3. To have an insight into the management of profit in an organization. 4. To examine the financial performance of the company for the period from 2003 to 2007. 5. To assess the working capital employed by the company. 6. To highlight the short comings in the area of finance with the aid of comparative analysis and

common size analysis funds flow analysis and to give recommendations with a view to increase efficiency of the company.

7. To identifying the financial strength and weakness of the company. 8. Analyze the future earnings of the company , based on these give the various suggestions.


NEED FOR THE STUDYNEED FOR THE STUDYNEED FOR THE STUDYNEED FOR THE STUDY

Financial statement analysis is used to identify the trends and relationships

between financial statement items. Both internal management and external users (such as analysts, creditors, and investors) of the financial statements need to evaluate a company's profitability, liquidity, and solvency. The most common methods used for financial statement analysis are comparative statements, common-size statements, funds flow analysis and ratio analysis. These methods include calculations and comparisons of the results to historical company data, competitors, or industry averages to determine the relative strength and performance of the company being analyzed.

Financial statement analysis is to diagnose the information contained in financial

statements so as to judge profitability and financial soundness of the firm. Just like a doctor examines his patient by recording hi body temperature, blood pressure, etc. before making conclusion regarding the illness and before giving his treatment, a financial analyst analysis before commenting up on the financial health or weakness of an enterprise.

RESEARCH METHODOLOGYRESEARCH METHODOLOGYRESEARCH METHODOLOGYRESEARCH METHODOLOGY

The research design refers to preplanning of what a researcher does in his study.

The design adopted in the study comes under exploratory and evaluatory research. Since the data collected from the financial statements of the company is analyzed under various financial and tactical tools.

Data collection;

The study is based on the two types data is obtained from the chittoor co-operative sugars ltd., chittoor.

They are: � Primary data � Secondary data

Primary Data; Primary Data is obtained through the discussion with officials of the chittoor co-operative sugars ltd., chittoor.

Secondary Data;

Secondary data is based on the past data i.e. [five years Annual Reports 2003-2007]


SCOPE OF THE STUDYSCOPE OF THE STUDYSCOPE OF THE STUDYSCOPE OF THE STUDY

� In our present day economics, finance is defined as the provision of money at the time when it is required. Every enterprise whether big medium or small needs finance to carry on its operations and to achieve its target. In fact finance is so indispensable today that it is rightly said that it is the life blood of industry without adequate finance no enterprise can possible accomplish it objectives

� Finance is therefore viewed as the most important area in every enterprise. Therefore the management requires giving special attention on this .The conventional approach to finance function in business high light the procurement of funds on the mot economic and favorable terms to concern. But it ignores the efficiency and prepares of the same for the successful running of the enterprise. In every organization funds are needed for various ventures and projects.

� The basis for financial planning and analysis is financial information, financial need to Predict compare and evaluate the forms earning ability. It is also required to aid in economic decision making., Investment and financial statements or accounting reports

� It contains summarized information of the firm’s financial affairs,. Organized systematically. They are the means to present the firm’s situation to owners, creditors and general public, preparation of the statements is the responsibility of top management. They should be prepared very carefully and contain as much information a possible because they are very useful to judge the financial efficiency of the company.

CAPITAL STRUCTURE Original project cost was Rs.128.50 lakhs. It has been funded from following sources: Rs. Lakhs

I. Share capital from a. Cane grower members 8.50 b. State Government 25.00

II. Loans a. IFCI New Delhi 75.00 b. LICI Bombay 20.00

Total 128.50 III .Capital outlay

Land 2.38 Buildings 5.90 Plant and Machinery 109.34 Other assets 5.77 Pre-operative expenses 4.00 Vehicles 0.96


Total 128.35 IV. Present Value of the Assets as on 31.03.2000 V. Land 497.19

a. Buildings 423.85 b. Plant & Machinery 1155.70 c. Other assets 34.73 d. Transport vehicles 19.94 e. Total 2131.41

Membership Share Capital No amount (in. lakhs) a. Members 13448.00 185.57

State Government 1 1208.44

13449.00 1394.01

b. NRD & NRFD of members 213.69 c. Accumulated Loss of on 31.03.03 1782.39 (As per perform accounts) 3390.09

WAGE STRUCTURE The wages of the workers are covered by “sugar wage board” recommendations at

“All India Level”.The minimum monthly wage of an unskilled worker at stalling of the time scale is Rs.3, 901. Sugar year (season) is reopened from 1st Oct to 30th Sep next year. Generally cane crushing operations are commenced during 3 week of November and continued up to end of April of next year. From May-Oct is off season. CANE DEVELOPMENT AND INCENTIVES TO CANE GROWERS

There is a separate agriculture wing in factory headed by a chief Agriculture officer. Total area of operation is divided into 36 circles. For each circle, there is one field men 36 field men’s work is supervised by 8 agricultural officers. Following are developmental activities being implemented. � Arrange soil testing at factory’s soil laboratory. � A supply of improved varieties of seed in consultations with regional agricultural

research stations. � Arrange survey and extend loans and subsides for drilling of surface and in well bores. � Arrange educational tours, to selected cane suppliers, within and outside the state.

MANAGEMENT

At present the elected board has assumed charge on 06.04.2000. The present Board of Directors as detailed below:


President 1

Board of Directors 14 Employees Director 1 Total 16 Chief Executive & Functioning Of Various Departments a. Chief executive of the society is Managing Director having a seat on the Board. b. There are five major departments

1. Administrative 2. Engineering 3. Manufacturing 4. Agriculture 5. Accounts & Finance

c. All aspects of Accounting, sugar cane weightiest and laboratory analysis reports are computerized during 1989-90. For better cane regulation. Wireless System was also introduced during 1989. At all 8 division Head Quarters and at Administrative Office Wireless Stations and sets are installed.

d. All policy mater are decided by Board/Person-in-charge. e. Cane price Before commencement of sugar cane crushing season, Government of India notifies

statutory minimum cane price payable by each sugar factory. This is to be paid within 14 days from the date of purchases. Over and above the statutory minimum cane price state Government announces a State advisory price payable by each Sugar factory. This SAP is being paid by us. We have crushed cane for the season 1999-2000 is 2,82,202.592 Mts with an average recovery 9.038

INVESTMENT ON FIXED ASSETS • The capital expenditure proposals are ascertained by the government of A.P. prior A.P.Prior

to this Accounts officer of the accounts department has to prepare budget of the concern (through departmental heads.)

• Board of directors (BODs)/ director of sugar are authorized to decide Investment on fixed assets.

• There is no limit fixed on the size of the investment on fixed assets. The concern is having machinery’s worth 1 crore also. Some times in purchase of large assets the procedure is resolutions are kept before MID or Director of sugar if they feel to have the resolutions passed then it is kept and makes it accepted in Board meeting.

• No officers of the undertaking exceeded the authorized limits of the fixed assets. • Based on the need & necessity of the firm the investment on the fixed asserts is made. The

MD or Director of sugar must approve it. • No special techniques have been adopted for evaluating investment proposals on the fixed

assets. According to the decisions of the board various investment proposals are made on the fixed assets.

• Based on Tender system & state level purchase co decisions fixed assets are purchased.


• Tenders are scrutinized based on the viewing company’s past Performance, quotation made, and standard of the asset.

• The method of depreciation is Straight-line method and based on IT Act. Depreciation rates for the different assets are fixed at different Rates like on machinery’s 10%

• On loose tools @ 6% & some assets doesn’t carry depreciation. • No depreciation reserve fund has been maintained.

CASH MANAGEMENTCASH MANAGEMENTCASH MANAGEMENTCASH MANAGEMENT • No Separate Organization For cash management is maintained in the society.

• Major things in the concern are the sugarcane. The sugarcane is a seasonal crop and of course this is treated as main important thing for the firm. Tenders are invited in purchasing the cane. Based on the availability of the sugar cane working capital requirements are made.

• Tender are procedure adopted for this purpose. • Liquidity question doesn’t arise because the society deals almost all each & every transaction

through bank, DD’s and Cheques. • No policy has been followed regarding optimal cash balance in the society. • Working capital requirements are mainly from the sugarcane growers. • Through unsecured short-term loans & over drafts short-term loans are raised. • Cash credit limits doesn’t arise. • The head of the department regulates cash balances. • Adequacy of cash balance doesn’t rise. • There is no case were surplus/in adequacy of cash balances in the society.

INVENTORY MANAGEMENT There is no question of setting up of the organization for maintenance of materials & stores. Usually store keeper looks after the maintenance of the materials & stores of the concern. Yes, there is a separate department for purchases. Usually at the very beginning of the season sugarcane is purchased in bulk. If needed further purchase is made by inviting tenders & quotations. Usually purchase committee goes for the lower tender for purchase of sugarcane. BILLS RECEIVABLES MANAGEMENT Bills receivables arise only when the product is sold on credit basis i.e., when credit sales take place bills came to the show. But the society sells the sugar on cash & DD. Sale of sugar is mad by receiving cash/DD. So bills receivable doesn’t arise. Society directly sells the sugar to government sometimes. PROFITABILITY MANAGEMENT Various products of the society are:

• Sugar, molasses, press mud contains sulphur used as fertilizers. • The nature of the market is competitive. • The size of the market is National wide.

The close competitors are:


S.V.Sugar factory in Renigunta Vani sugars in Punganur Vellore Sugar Factory & Mayura Sugars in B.N.Kandriga.

The pricing practice followed by the enterprise is: • Competitive pricing in case of sugar. • Prices based on government award in case of cane. • The enterprise products are priced correctly. • The government for the fixation of prices of the products has fixed no guideline. • Profit motive is the primary objective in the fixation of the prices. • Yes the enterprise adopting the system for profit planning & control. Profit target is determined by: • Minimizing the cost of production to achieve more profits. The department involved in the profit planning is: Accounts department. For achieving the profits the management has been reviewing on cost of production. To get good recovery in sugar frequent enlightenment program has been done with members by agricultural experts and receive instructions to the head of the institution.

IntrodIntrodIntrodIntroduction to Financial Statementsuction to Financial Statementsuction to Financial Statementsuction to Financial Statements

A financial statement is a collection of data organized according to logical and consistent accounting procedures. Its purpose is to convey an understanding of some financial aspects of a business firm. It may show a position at a movement in time, as in the case of balance sheet, or may reveal a series of activities over a given period of time, as in the case of an income statement.

Financial statements are the outcome of summarizing process of accounting. In the words of John N. Myer “the financial statements provide summary of accounts of a business enterprise, the balance sheet reflecting the assets, liabilities and capital as on a certain date and the income statement showing the results of operations during a period.” financial statements are prepared as an end result of accounting and are the major sources of financial information of an enterprise. Smith and Asburne define financial statements as, “the end product of financial accounting in a set of final statements prepared by the accountant of a business enterprise that purport to reveal the financial position of the enterprise, the result of its current activities, and an analysis what has been done with earnings.”

Financial statements are also called financial reports. In the words of Anthony

“financial statements, essentially are interim reports, presented annually and reflect a division of the life of an enterprise into more or less arbitrary accounting period more frequently a year.”

Nature of financial statements:


The financial statements are prepared on the basis of recorded facts. The recorded facts are those which can be expressed in monetary terms. The statements are prepared for a particular period, generally one year. The transactions are recorded in a chronological order, as and when the events happen. The accounting records and financial statements prepared from these records are based on historical costs. The financial statements, by nature, are summaries of the items recorded in the business and these statements are prepared periodically, generally for the accounting period.

The American Institute of Certified Public Accountants states the nature of financial statements as “Financial Statements are prepared for the purpose of presenting a periodical review of report on progress by the management and deal with the status of investment in the business and the results achieved during the period under review. They reflect a combination of recorded facts, accounting principles and personal judgments.” The American Accounting Association expresses in its statement. “Every corporate statement should be based on accounting principles which are sufficiently uniform, objective and well understood to justify opinions as to the condition and progress of business enterprise. Its basic assumption was that the purpose of periodic financial statements of a corporation is to furnish information that is necessary for the formation of dependable judgments.”

Objectives of financial statements:

Financial statements are the sources of information on the basis of which conclusions are drawn about the profitability and financial position of a concern. They are the major means employed by firms to present their financial situation of owners, creditors and the general public. The primary objective of financial statements is to assist in decision making. The Accounting Principles Board of America (APB) states the following objectives of financial statements:

(i) To provide reliable financial information about economic resources and obligations of business firm.

(ii) To provide other needed information about changes in such economic resources and obligations.

(iii) To provide reliable information about changes in net resources (resources less obligations) arising out of business activities.

(iv) To provide financial information that assists in estimating the earning potentials of business. (v) To disclose, to the extent possible, other information related to the financial statements that is

relevant to the needs of the users of these statements.

Financial Statement AnalysisFinancial Statement AnalysisFinancial Statement AnalysisFinancial Statement Analysis

Financial analysis is the process of determining financial strengths and

weakness of the firm by establishing strategic relationship between the items of the items of the balance sheet, profit and loss account and other operative data. In the words of Myers, “financial statements analysis is largely a study of relationship among various financial factors in a


business as disclosed by a single set of statements, and a study of the trend of these factors as shown in series of statements

The purpose of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and financial soundness of the firm. The analysis and interpretation of financial statements is essential to bring out the mystery behind the figures in financial statements. Financial statements analysis is an attempt to determine the significance and meaning of the financial statement data so that forecast may be made of the future earnings, ability to pay interest and debt maturities (both current and long term) and profitability of a sound dividend policy.

The term financial statement analysis includes both ‘analyses, and ‘interpretation’. A distinction should be made between the two terms. While the term ‘analysis’ is used to mean the simplification of financial data by methodical classification of the data given in financial statements, ‘interpretation’ means ‘explaining the meaning and significance of the data so simplified’. However, both ‘analysis and interpretation’ are interlinked and complementary to each other. Analysis is useless without interpretation and interpretation without analysis is difficult or even impossible. Methods of Financial Analysis:

The analysis and interpretation of financial statements is used to determine the financial position and results of operations as well. A number of methods or devices are used to study the relation ship between different statements. An effort is made to use those devices which clearly analyze the position of the enterprise. The following are the methods of analysis are generally used:

1. Comparative statements 2. Common-size statements 3. Funds flow analysis 4. Ratio analysis

1. Comparative Statements:

The Comparative financial statements are statements of financial position at different periods; of time. The elements of financial position are shown in comparative form so as to give an idea of financial position at two or more periods. Any statement prepared in comparative form will be converted into comparative statements. From practical point of view, generally, two financial statements (balance sheet and income statement) are prepared in comparative form for financial analysis purpose. Not only the comparison of the figures of two periods but also be relationship between balance sheet and income statement enables an in depth study of financial position and operative results. i) Comparative Income Statement:

The income statement gives the results of the operations of business. The comparative income statement gives an idea of the progress of a business over a period of time. The changes in absolute data in money values and percentage can be determined to analyse the profitability of the business. ii) Comparative Balance Sheet:


The comparative balance sheet analysis is the study of the trend of the same items, group of items and computed items in two or more balance sheets of the same business enterprise on different dates. The changes in periodic balance sheet items reflect the conduct of a business. The changes can be observed by comparison of the balance sheet at the beginning and at the end of a period and these changes can help in forming an opinion about the progress of an enterprise. 2. Common-size Statements:

The common-size statements, balance sheet and income statement are shown analytical percentages. The figures are shown as percentages of total assets, total liabilities and total sales. The total assets are taken as 100 and different assets are expressed as percentage of the total. Similarly, various liabilities are taken as part of total liabilities, these statements also known as component percentage because every individual item is stated as percentage of the total 100.

The short comings in comparative statements and trend percentages where

changes in items could not be compared with the totals have been covered up. The analyst is able to asses the figures in relation to total values. Common-size Income Statement:

The items in income statement can be shown as percentages of sales to show the

relation of each item to sales. A significant relationship can be established between items of income statement and volume of sales. The increase in sales will certainly increase selling expenses and not administrative and financial expenses. In case the volume of sales increases to considerable extent, administrative and financial expenses may go up. In case total sales are declining, the selling expenses should be reduced at once. So, a relationship is established between sales and other items in income statement and this relationship is helpful in evaluating operational activities of the enterprise.

ii) Common-size Balance Sheet:

A statement in which balance sheet items are expressed as the ratio of each asset to total assets and the ratio of each liability is expressed as a ratio of total liabilities is called common size balance sheet. The common size balance sheet can be used to compare companies of different size. The comparison of figures in different periods is not useful because total figures may be affected by a number of factors. It is not possible to establish standard norms for various assets.

3. Funds flow analysis:

Funds flow statement shows the movement of funds and is a report of the financial operations of the business undertaking. It indicates various means by which funds were obtained during a particular period and the ways in which these funds were employed. The flow of funds occur when a transaction changes on the one hand and non-current account and on the other a current account & vice- versa.


Flow of funds:

Various sources from which funds were raised and the uses to which these funds were put. Funds flow statement is formulated on the basis of working capital basis and on Cash basis

Steps in pre preparation of funds flow statement: 1. Increase or decrease of working capital 2. Funds from operations 3. Funds flow statement

Importance of Funds flow statement :

1. It helps in the analysis of financial operations 2. It throws light on many perplexing questions of general interest 3. It helps in formation of a realistic dividend policy. 4. It acts as future guide 5. It helps in the proper allocation of resources 6. It helps in appraising the use of working capital 7. It helps in knowing the overall credit-worthiness of a firm

Funds flow statement:

1. It should be remembered that a funds flow statement is a substitute to the income statement or a balance sheet. It provides only some additional information as regards changes in working capital.

2. It cannot reveal continuous changes. 3. It is not an original statement but simply arrangement of data given in the Financial

statement.

5. Ratio analysis:

Ratio analysis is a powerful tool of financial analysis. It is used as benchmark for calculating the financial position and performance of a firm. The absolute accounting figure reported in the financial statements does not provide the meaningful performance of financial position in the firm, ratio helps to summarize the large quantity of data to make qualitative judgment about the firm’s performance.

Types of ratios:

Ratios are calculated from the accounting data are grouped into various classes according to financial activity. In view of the requirement of various users of ratios it is classified into four important categories:

Current Liabilities

Non-Current Non-Current Liabilities

Current


1. Liquidity Ratio 2. Leverage Ratio 3. Activity Ratio 4. Profitability Ratio

1. LIQUIDITY RATIO: It means the ability of the firm to meet its current obligations. The ratio

establishers the relationship between cash and other current assets to current obligations. The most common ratios are:

i. Current ratio ii. Quick ratio iii. Net Working Capital ratio

i. Current ratio:

The current ratio indicates the availability of current assets in rupee for everyone of current liability. If ratio is greater than it means that the firm has more current assets than current liabilities against them.

Current Assets Current Ratio = ----------------------

Current Liabilities Standard Ratio is 2:1 ii. Quick ratio:

The ratio establishes a relationship between liquid assets and liquid liabilities. Inventories are considered to be less liquid a sit normally required same time for realizing in cash and their values have tendency to fluctuate. Hence quick ratio is found out by dividing the total of quick assets by total current liabilities.

Quick Assets

Quick Ratio = --------------------- Current Liabilities

iii. Networking capital ratio:

The difference between current assets and current liabilities excluding short-term bank borrowing is called net working capital or net current assets is sometimes used as a measure of a firm’s liquidity. It is considered that, between two firms, the one having the larger NWC has the greater ability to meet its current obligations. This is not necessarily so; the measure of liquidity is a relationship, rather than the difference between current assets and current liabilities. NWC, however, measures the firm’s potential reservoir of funds. It can be related to net assets (or capital employed).


Net Working Capital

NWC Ratio =

Net Assets

2. LEVERAGE RATIO:

Leverage ratio may be calculated from the balance sheet items to determine the

proportion of debt in total financing. It is also calculated form income statement items to determine the extent to which operating profits are sufficient to cover fixed charges. Leverage ratios are calculated to measure the financial risk and the firm’s ability of using debt.

i. Debt ratio ii. Debt-Equity ratio iii. Capital employed to net worth

i. Debt ratio:

Debt ratio used to analyses the long-term solvency of a firm. The firm may be interested in knowing the proportion of the interest-bearing debt in the capital structure. It may, therefore, compute debt ratio by dividing total debt by capital employed or net assets. Total debt will include short and long-term borrowing from financial institutions, debentures/bonds, deferred payment arrangements for buying capital equipments, bank borrowings, public deposits and any other interest-bearing loan. Capital employed will include total debt and net worth.

Total Debt

Debt Ratio = Capital Employed

ii. Debt equity ratio:

Relationship between borrowed funds and owners equity a high ratio shows a large share of financing by creditors relative to owners a low ratio inputs in smaller claim of creditors. If the debtors equity ratio is high owners are putting up relatively less money of there own it is danger signal for creditors.

iii. Capital employed to net worth ratio:

There is yet another alternative way of expressing the basic relationship between debt and equity one may want to know: How much funds are being contributed together by lenders and owners for each rupee of the owner’s contribution? This can be found out by calculating the ration of capital employed or net assets to net worth.


Capital Employed

CE-to-NW Ratio =

Net Worth 3. ACITIVITY RATIO:

Activity ratios are employed to evaluate the efficiency with which the firm managers and utilizes its assets. These are also known as turnover rations. These ratio’s starts the relationship between sales and assets. Some of the important ratios are:

i. Inventory turnover ratio ii. Debtors turnover ratio iii. Collection period

I. Inventory turn over ratio: The inventory turnover reflects the efficiency of inventory management indicates the efficiency of the firm in producing and selling its product. A high inventory turnover is indicative of good inventory management. It is calculated by dividing the cost of goods sold by the average inventory. The higher the inventory turnover larger the amount of profit

Cost of Goods Sold

Inventory Turn Over = Average inventory ii. Debtors turnover ratio:

Debtor’s turnover ratio explains the number of times the debt are converted into cash within a short period of time. This ratio establishes the relation between credit sales and debtors.

Sales

Debtor’s Turnover Ratio = Total debtors

iii. Collection Period:

The average number of days for which debtors remain outstanding is called the average collection period (ACP). The average collection period measures the quality debtors since it indicated the speed of their collection.

debtors Collection Period = x 360 days

Sales


4. PROFITABILITY RATIO:

The profitability ratios are used to calculate the efficiency of operating of the company. Profits are ultimate goal of every company and it should be continuously evaluated in terms of profits. Generally two major profits are calculated, they are

i. Gross profit ratio ii. Net profit ratio

i. Gross profit ratio:

The first profitability ratio in relation to sales reflects the efficiency with which management produces each unit of product. It is calculated by dividing the Gross Profit with Sales.

Gross profit

Gross Profit ratio = x 100 Sales

ii. Net profit ratio:

Net profit ratio explains the net profit of the company after paying taxes of particular period. It establishes relation between net profit and sales.

Net Profit

Net profit ratio= Sales

RATIO ANALYSIS

LIQUIDITY RATIOS Table1: Current ratio

Years Current assets Current liabilities Ratio

2003 288,997,580 189,006,552 1.53

2004 177,122,556 142,210,762 1.25


2005 206,490,630 148,633,390 1.39

2006 398,960,970 190,005,314 2.10

2007 391,339,953 276,101,207 1.42 Source: Annual Reports of CCSL

Interpretation:

From the above graph it was analyzed that current ratio was decreased from 1.53 to 1.25, increased to 1.39 and increased to 2.10 and again decreased to 1.42 .The current ratio is less than the rule of thumb 2:1 except the year 2006.

Table2: Quick ratio

Years Quick assets Current liabilities Ratio

2003 69,334,778 189,006,552 0.37

2004 80,262,817 142,210,762 0.56

2005 99,258,431 148,633,390 0.67

2006 94,319,524 190,005,313 0.50

2007 109,757,257 276,101,206 0.40


Source: Annual Reports of CCSL

Interpretation:

From the above graph it was analyzed that quick ratio was increased from 0.37 to 0.67 and decreased to 0.40 it was due to improper maintenance of quick assets. The quick ratio was below the rule thumb of 1:1 i.e. quick assets were less than current liabilities.

Table3: Net working capital


Years Net working capital Net assets Ratio

2003 99,991,031 325,654,257 0.31

2004 34,911,795 260,575,021 0.13

2005 60,668,199 287,272,474 0.21

2006 208,955,659 435,610,011 0.48

2007 115,238,248 352,622,327 0.33


Interpretation: From the above graph it was analyzed that net working capital ratio had decreased

from 0.31 to 0.13 in 2004, increased to 0.21 in 2005, increased to 0.48 and again decreased to 0.33. it was due to the changes in working capital requirements.

LEVERAGE RATIOS

Table1: Debt ratio

Source:

Annual Reports of CCSL

Years Total debt Capital employed Ratio

2003 264452746 325654257 0.81

2004 452550346 260575021 1.74

2005 514161592 287272474 1.79

2006 668649834 435610011 1.53

2007 673709257 352622327 1.91


Interpretation:

From the above graph it was analyzed that the debt ratio mostly increased. It is due to increase in additional funds required year by year.

Table2: Debt equity ratio

Years Total debt Net Worth Ratio

2003 264452746 61201511 4.32

2004 452550346 7940102 57.00

2005 514161592 -7955293 -64.63

2006 668649834 245159 2727.41

2007 673709257 -88281982 -7.63 Source: Annual Reports of CCSL


Interpretation: From the above graph it was analyzed that the lenders contribution is more than

the owners contribution, in the years 2005 and 2006 there is no owner’s contribution. So, the debt equity ratio became negative.

Table3: Capital employed to net worth

Years Capital employed Net Worth Ratio 2003 325654257 61201511 5.32

2004 260575021 7940102 32.82

2005 287272474 -7955293 -36.11

2006 435610011 245159 1776.85

2007 352622327 -88281982 -3.99



Interpretation:

From the above graph it was analyzed that capital employed to net worth was 5.32%, increased to 32.83% in 2004, became negative in 2005,2007 and in the year 2006 increased to 1776.85% due to changes in the value of net worth of the firm.

ACTIVITY RATIOS

Table1: Inventory turnover

Years Cost of goods sold Average inventory Ratio

2003 239132131 234147889 1.02

2004 155574480 137597980 1.13

2005 102243876 83065442 1.23

2006 72877770 182464926 0.40

2007 406536335 264313376 1.54



Interpretation:

From the above graph it was analyzed that the inventory turnover ratio was very low in all the years, due to excess inventory levels in all the years.

Table2: Debtors turnover

Years Sales Debtors Ratio

2003 201486573 51412361 3.92

2004 130517437 54894708 2.38

2005 96920394 67056512 1.45

2006 124629659 73209660 1.70

2007 368853567 75541003 4.88



Interpretation:

From the above graph it was analyzed that in 2005 and 2006 debtors turnover ratio is very low due to most of the goods were sold on credit.

Table3: Collection period

Years Debtors Sales Ratio

2003 51412361 201486573 91.86

2004 54894708 130517437 151.41

2005 67056512 96920394 249.07

2006 73209660 124629659 211.47

2007 75541003 368853567 73.73 Source: Annual Reports of CCSL


Interpretation:

From the above graph it was analyzed that collection period increased up to

2005 and then decreased, due to most of the goods were sold on credit debts are

outstanding.

PROFITABILITY RATIOS

Table1: Gross profit ratio

Years Gross profit/loss Sales Ratio

2003 -37645558 201486573 -18.68%

2004 -25057043 130517437 -19.20%

2005 -5323482 96920394 -5.49%

2006 51751887 124629659 41.52%

2007 -37682768 368853567 -10.22% Source: Annual Reports of CCSL


Interpretation:

From the above graph it was analyzed that gross profit ratio was negative for most of the years except the year 2006 it is due to inefficiency in producing goods.

Table2: Net profit ratio

Years Net profit/loss Sales Ratio

2003 -67413729 201486573 -33.46%

2004 -62633704 130517437 -47.99%

2005 -35256615 96920394 -36.38%

2006 -8199872 124629659 -6.58%

2007 -93637848 368853567 -25.39% Source: Annual Reports of CCSL


Interpretation:

From the above graph it was analyzed that in all the years the net profit ratio

is negative due to over all inefficiency in the firm.



FINDINGS

� Cost of goods sold was more than the sales except the year 2006. So, the chittoor co-operative sugars ltd. got gross loss in most of the years.

� Operating loss decreased up to the year 2006 and then increased in the year 2007. � The chittoor co-operative sugars ltd. did not earned net profit in all the years. � It had been maintaining high inventory levels for all the years. � In most of the years debtor’s collection period was very high. � Most of the funds rose through debts with high interest rates.

� Most of the funds were lost in operations.

SUGGESSIONS

� CCSL should adopt cost control measures by drawing inspiration from prospering sugar factories.

� CCSL should reduce operating and administrative expenses, it will increase over all efficiency of the firm.

� A high level of debt introduces inflexibility in the firms operations due to increaseasing interference and pressures from creditors. A high debt company is able to borrow funds on very restrictive terms and conditions. So, it should raise owners funds.

� CCSL can adopt forward integration strategy by opening retail outlets where its own sugar can be sold. It increases revenues one hand and cash position on the other.

CONCLUSION

� The present study of “FINANCIAL PERFORMANCE ANALYSIS IN CHITTOOR CO-OPERATIVE SUGARS LTD,.” Was conducted with the help of annual report. Various financial tools are used in the study from the ratio analysis it has been found out that the average collection period of the company is high and capital gearing is low. To extent possible the study has achieved its stated objectives. It is on the part of the company to accept the suggestions.

� CCSL Profitability position was deteriorated year by year, liquidity position also

moderate, long term solvency of the firm is also moderate due to high debts, the firm’s efficiency in utilizing assets is also very low.


� Finally the study helped me to acquire practical knowledge that was only over by books and papers alone. I take up this opportunity to thank one and all for making this study a complete one.

BIBILOGRAPHY

BOOKS

� Financial Management I. M. Pandey Ninth Edition Vikash Publishing house Pvt ltd. � Financial Management Theory and Practice Prasanna Chandra Sixth Edition Tata Mc

Graw Hill Publishing company. � Management Accounting Principles and Practice R. K. Sharma Sahashi K. Guptha

Eigth edition kalyani publishiers. � Dr .S.N. Maheswari-financial management G.G.S. Indraprasatha university , new delhi.

WEBSITES � www.cliffsnotes.com � www.financial-education.com

LIMITATIONSLIMITATIONSLIMITATIONSLIMITATIONS

� Financial statements are prepared on the basis of certain accounting concepts and conventions.

� Any change in the methods or procedures of accounting systems limits the utility of financial statements.

� Ratios of the past are not true indicators of future. � Financial analysis is based on monetary information and non monetary information ignored. � Liquidity ratio can mislead since current assets and current liabilities can change quickly.

Their utility become more doubtful for firms with seasonal business.

Financial prfomance

Economy & Finance

financial management

abstract financial analysis

financial weakness

financial planning

financial strengths

debt ratio

nature of analysis

financial position